Brian Gaynor 's Opinion

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor: KiwiSaver outshines Treasury prediction

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Growth to 2.1 million members by the end of March has beaten the original assumptions

Investors can do a better job of growing their savings if they take a more adventurous approach to fund selection. Photo / Thinkstock
Investors can do a better job of growing their savings if they take a more adventurous approach to fund selection. Photo / Thinkstock

ZThe latest figures show that KiwiSaver is a massive success, probably the most popular scheme ever introduced by a New Zealand government.

At the end of March KiwiSaver had 2,094,088 members with investments worth $16.4 billion. This compares with Treasury's original assumptions that there would be 680,000 members by mid-2014.

Around 64 per cent of the country's 18 to 64 age group have joined KiwiSaver compared with Treasury assumptions that only 25 per cent of this age group would have joined by June 2014.

Why haven't the remaining 980,000 individuals between 18 and 64 joined up?

One of the features of the scheme is the way that individuals have raised their contributions while the Government's role has been declining.

In the first three years, from October 2007 to September 2010, the Crown supplied 40.9 per cent of the scheme's funds and individuals 41.1 per cent with employers contributing the rest.

In the past 30 months the Government contributed 31.3 per cent while individuals upped their ante to 42.8 per cent.

KiwiSaver will take a while to build up but it should have the same positive contribution to the economy as compulsory superannuation has in Australia.

Total Australian superannuation funds have surged from A$109 billion in the late 1980s to A$1.5 trillion ($1.8 trillion) and the amount of these funds invested in Australian equities has swollen from just A$18 billion to A$421 billion over the same period.

This has been an important driving force behind the Australian economy which is the only OECD country to avoid a recession over the past 20 years.

KiwiSaver could have a similar impact on the New Zealand economy as long as the money is invested wisely, particularly into growth orientated domestic companies.

The scheme has been a huge success partly because it has delivered impressive returns for investors, even during the recent global recession.

For example the total value of all KiwiSaver funds increased by $3.9 billion in the year ended March 2013 with new contributions from individuals accounting for 37 per cent of this, employers' contributions 20 per cent, the Crown 17 per cent and investment returns 25 per cent.

The composition of the full $16.4 billion over the 5½ years of the scheme is as follows:

• $6 billion or 37 per cent has been contributed by individuals.

• $5 billion or 31 per cent has come from the government.

• Employers have contributed $3.3 billion or 20 per cent.

• Investment returns have accounted for $2.1 billion or 13 per cent of the total.

The investment returns are probably understated because the Reserve Bank may not have captured all KiwiSaver funds in its $16.4 billion figure.

Any scheme where individuals, on average, can turn 37c into 100c is bound to be extremely popular.

However, the important term here is "on average" because some investors have done much better than the average while others have not. For example members who haven't received any employer contributions will have achieved much lower returns on their individual contributions.

The right-hand column in the accompanying table shows the performances of the 10 largest KiwiSaver funds for each of the past three March years.

The 10 largest funds, which represented 47 per cent of all the funds included in the Morningstar KiwiSaver Performance Survey, had returns of between 5.9 per cent and 13.1 per cent for the 12 months ended March 31, 2013.

The following comments can be made about these March 2013-year performance figures:

• Six of the 10 largest funds are in the conservative category, two in the moderate sector, one in balanced and one in growth.

• The median return for these 10 funds was 8.2 per cent for the March 2013 year.

• The median return for the six default funds, which dominate this top 10 group, was only 7.1 per cent for the 12-month period.

• A staggering 96 of the 134 funds included in the Morningstar survey outperformed the 8.2 per cent median return for the 10 largest funds during the March 2013 year.

The clear message from these figures is that investors could do a great deal better if they took a more adventurous approach towards KiwiSaver fund selection and had a stronger bias towards balanced or growth funds.

The counter argument to this is that growth funds are more volatile and these growth funds can be the best-performing KiwiSaver fund one year and the worst-performing fund the following year.

This is true and our 10 largest KiwiSaver funds are a good example of this.

The only growth fund in the top 10 was the best performer in the March 2013 year, with a return of 13.1 per cent.

However, it was also the worst-performing top 10 fund the previous year, with a negative return of 4.8 per cent and the top-performing fund in 2010/11, with a positive return of 10.5 per cent.

The important point is that investors should adopt a long-term strategy on KiwiSaver and the only growth fund amongst the 10 largest KiwiSaver funds has had a return of 8.3 per cent per annum for the five years ended March 2013 whereas the best-performing default fund returned only 6.3 per cent per annum over the same period and the median default fund just 5.8 per cent per annum.

There is a vastly different outcome between annualised returns of 8.3 per cent and 6.3 or 5.8 per cent over a long period.

This is a major reason why KiwiSaver investors should ensure that they have the most appropriate fund from a risk and return point of view.

Finally the worst-performing default fund over a one-year, three-year and five-year basis has only 20 per cent invested in growth assets with a massive 45 per cent held in cash. This is far too conservative except for investors who are close to 65 and are about to cash up their KiwiSaver investments.

Meanwhile, the latest Morningstar Global Fund Investor Experience 2013 Report shines a disapproving spotlight on the New Zealand funds management business.

Morningstar gives New Zealand a C- whereas most countries receive a B, B- or C+. Only South Africa, of the 24 countries in the report, ranks below New Zealand.

Our fund management industry performs particularly poorly in terms of disclosure where Morningstar gives us a D.

Morningstar had this to say about New Zealand: "Remarkably, mutual funds (PIEs) in New Zealand are not required to publish a full and complete disclosure of portfolio holdings. This applies to the investment statement, annual report, and any other fund literature. New Zealand does not have a website with an electronic repository of fund documents."

Morningstar notes that new disclosure rules will be introduced later this year in terms of full portfolio holding disclosure and the names of portfolio managers.

They will require a more consistent calculation and disclosure of management fees.

This is a welcome development but a number of these new requirements will not apply to non-KiwiSaver funds and full portfolio holdings will only have to be disclosed once a year.

One of the more interesting features of our investment community is that it argues strongly against regulation yet is often unwilling to adopt best practice international standards until forced to do so by regulation.

It is a shame that many fund managers are unwilling to adopt higher standards of disclosure because the inevitable consequence of this is the introduction of more and more heavy-handed regulation.

Unfortunately this will not always be to the benefit of investors.


Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.

- NZ Herald

Brian Gaynor

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the Financial Markets Authority (FMA) in 2011. He is also a Portfolio Manager at Milford Asset Management.

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